What are Short-Term and Long-Term Capital Gains?
The taxation of capital gains hinges on whether they are deemed long-term or short-term. If an individual owned the land for less than 24 months before selling it and earned a profit, it is considered a short-term capital gain. On the other hand, if the land is held for more than 24 months, it falls under the category of long-term capital gain.
Understanding the Difference Between Short-Term and Long-Term Capital Gains Tax
Short-Term Capital Gains (STCG)
Short-term capital gains arise from the sale of assets held for a brief period.
-
Holding Period:
- Real estate, physical gold, and other mutual funds: More than 24 months.
- Listed securities, unlisted bonds, and equity-oriented mutual funds: More than 12 months.
Long-Term Capital Gains (LTCG)
Long-term capital gains arise from the sale of assets held for a longer duration.
-
Holding Period:
- Real estate, physical gold, and other mutual funds: More than 24 months.
- Listed securities, unlisted bonds, and equity-oriented mutual funds: More than 12 months.
Comparison: Short-Term vs. Long-Term Capital Gains
| Basis |
Short-Term Capital Gains (STCG) |
Long-Term Capital Gains (LTCG) |
| Definition |
Profit from the sale of short-term assets. |
Profit from the sale of long-term assets. |
| Holding Period |
- Real estate, gold, etc.: ≤ 24 months.
- Listed securities, equity mutual funds, etc.: ≤ 12 months.
|
- Real estate, gold, etc.: > 24 months.
- Listed securities, equity mutual funds, etc.: > 12 months.
|
| Market Perspective |
Traders aim for short-term profits with quicker transactions. |
Investors have a long-term perspective, focusing on higher profits over time. |
| Profit Potential |
Generally lower profits due to shorter holding periods and less market stability. |
Higher profits expected as assets mature and stabilize in the market. |
| Risk Involvement |
Lower risk due to shorter holding periods and quicker liquidity. |
Higher risk due to longer holding periods and potential illiquidity. |
| Taxability |
- Section 111A: Taxed at 20% (excluding surcharge and cess).
- Non-111A STCGs: Taxed at regular income tax rates.
|
Taxed at 12.5% (excluding surcharge and cess). Indexation benefits removed as per Budget 2024. |
How to Calculate Capital Gains on Sale of Land in India?
Before we learn how to calculate capital gains on sale of land, let’s understand a few terms as described in below table:
| Terms |
Description |
| Cost of acquisition |
This includes the expenses incurred and the original purchase price of the land. |
| Cost of improvement |
You can add the renovation cost to the land during the holding period to the land acquisition cost. |
| Selling price |
The selling price is the actual amount received from the land transfer. It is crucial to account for any deductions, such as brokerage fees or other expenses directly associated with the sale. |
Tax Rate on Capital Gains
| Tax Type |
Condition |
Applicable Tax |
| Long-term capital gains tax (LTCG) |
Sale of:
- Listed Equity shares (If STT has been paid on purchase and sale of such shares)
- units of equity oriented mutual fund (If STT has been paid on sale of such units)
|
Till Rs.1.25 lakh-Exemption
12.5% over and above Rs.1.25 lakh |
| Others |
20% |
| Short-term capital gains tax (STCG) |
When Securities Transaction Tax (STT) is not applicable |
Normal slab rates |
| When STT is applicable |
20%. |
How to Calculate Capital Gains Tax on land in India?
Calculation of Long term Capital Gain -
| Particulars |
Amount |
| Total Selling Price |
1,000,000 |
| Less: |
|
Indexed cost of acquisition
Expenses directly related to sale and improvement (e.g., brokerage)
Exemption under Sections 54B, 54D, 54EC, 54F, 54G, or 54GA (if applicable
|
709,090.91
xx
xx
|
| Long-term capital gains |
xxx |
Note: The long term capital gains on the sale of land calculated above are subject to tax as specified under the Income Tax Act.
How to Save Capital Gains Tax on Sale of Land
In case you are selling the land after holding for 24 months or more, this will be treated as long term capital gains, and you have two options to save taxes on these long term capital gains.
Firstly, you can save tax on capital gains on land if you invest the amount after selling the land to purchase or construct a residential house under Section 5 F.
- To claim this capital gains exemption under Section 54F, you must be an individual or Hindu Undivided Family (HUF). Companies, Limited Liability Partnerships (LLPs), and other business entities are not eligible.
- The new residential property should be located within India and acquired within the prescribed timeframe:
- Purchase: within one year before or two years after the date of land sale.
- Construction: commencement within three years of the land sale date.
- The new property must be held for at least three years after purchase or construction to qualify for the exemption.
- On the date of transfer, the taxpayer shall not own more than one residential property, excluding the newly acquired/constructed one.
- Investing the entire sale proceeds in the new property allows you to claim the full capital gains exemption on sale of land. The exemption is proportionately reduced based on the investment ratio if only a portion is invested.
Secondly, If you’ve sold a plot and earned long-term capital gains, you can save on taxes by investing these gains in Capital Gain Bonds under Section 54EC. Here’s what you need to know:
Invest the unindexed capital gains (not the entire sale consideration) in bonds issued by these specified financial institutions:
- REC: Rural Electrification Corporation
- NHAI: National Highway Authority of India
- PFC: Power Finance Corporation
- IRFC: Indian Railway Finance Corporation
You must invest within six months from the date of sale of the property to claim the exemption. The maximum amount you can invest in these bonds is ₹50 lakhs in a single financial year. The six-month investment period can extend beyond the due date for filing your income tax return. Unlike other exemptions, you are not required to park unutilized funds in a Capital Gains Deposit Account.
Key Tip: Agricultural land in rural areas is not considered a capital asset. Therefore, capital gains from agricultural land situated in rural areas of India are not subject to tax. However, if the agricultural land is situated in urban area, it might be subject to tax.
Selling a property can be a lucrative investment, but it's essential to plan your finances wisely to save on capital gains tax. To plan your investments, talk to our experts today.
Tax Exemption on Sale of Land
Given below are the sections under which you can claim capital gain exemption on the sale of land in India -
| Section |
Exemption |
| Section 54F |
Claim this exemption when using proceeds from land sale to buy a new house property. |
| Section 54EC |
Claim when using proceeds to purchase specific notified bonds. |
| Section 54B |
Claim when proceeds from urban agricultural land sale are reinvested in another agricultural land. |
| Section 54D |
Capital gains on sale of land from compulsory acquisition reinvested in setting up another industrial undertaking. |
| Section 54G |
Exemption for capital gains when shifting industrial undertaking from urban to rural areas. |
| Section 54GA |
Exemption for capital gains when shifting industrial undertaking from urban to special economic zones. |
Capital Gain Account Scheme
Investing capital gains within the deadline to qualify for exemption can be challenging due to complexities in property acquisition. Recognizing this, the Income Tax Department offers the Capital Gains Account Scheme (CGAS). This scheme allows taxpayers to deposit their capital gains, even if they haven't yet identified an investment property, and claim exemption from capital gains tax on sale of land when filing their return by July 31st.
Maximizing Capital Gains Tax Savings: Beyond CGAS
If you're not planning to buy another property, investing in the CGAS (Capital Gains Account Scheme) isn't the only way to save capital gains tax on sale of land. You can also invest in specific tax-exempt bonds like REC, NHAI, PFC, or IRFC bonds. These bonds mature after five years and can't be sold before three years from the property sale date. You have six months to invest (but must do so before filing your tax return). The maximum investment in these bonds is Rs.50 lakhs per year.
CGAS vs. 54EC Bonds – Which is the Best Tax-Saving Option?
When selling a long-term capital asset, taxpayers in India must consider various tax-saving options to minimize their capital gains tax liability. Two popular choices are the Capital Gains Account Scheme (CGAS) and Section 54EC Bonds.
1. Capital Gains Account Scheme (CGAS)
The Capital Gains Account Scheme (CGAS) is a provision under the Income Tax Act that allows individuals to defer their capital gains tax liability by parking the gains in a designated account. This is particularly useful when the taxpayer intends to reinvest the proceeds in another property but has not yet finalized the purchase.
- Applicable to capital gains arising from the sale of residential property.
- The deposited amount must be used to purchase or construct another property within the stipulated time (2 years for purchase, 3 years for construction).
- The amount must be deposited in a Capital Gains Account with an authorized bank before the due date of filing the income tax return.
- If the funds remain unutilized after the prescribed period, they will be treated as taxable capital gains.
- Provides flexibility to utilize funds in stages for property-related investments.
2. Section 54EC Bonds
Section 54EC Bonds are fixed-income instruments that provide capital gains tax exemption when an individual reinvests their long-term capital gains from immovable property into these bonds.
- Applicable to long-term capital gains from land, building, or both.
- Eligible bonds are issued by REC, PFC, IRFC, and NHAI.
- Investment must be made within 6 months from the date of sale of the asset.
- The maximum investment limit is Rs. 50 lakh per financial year.
- The lock-in period is 5 years (previously 3 years, increased to 5 years in Budget 2018).
- The interest rate is typically around 5-5.25% per annum, which is taxable.
- Provides a low-risk investment avenue but lacks liquidity due to the lock-in period.
Comparison: CGAS vs. 54EC Bonds
| Feature |
CGAS |
54EC Bonds |
| Eligible Assets |
Residential property |
Land, building, or both |
| Tax Exemption Under |
Sections 54 & 54F |
Section 54EC |
| Investment Mode |
Capital Gains Account with a bank |
Specified 54EC Bonds (REC, PFC, IRFC, NHAI) |
| Maximum Investment Limit |
No specific limit |
Rs. 50 lakh per financial year |
| Time Limit to Invest |
Before the tax return due date |
Within 6 months of sale |
| Lock-in Period |
Until reinvested in property (2-3 years) |
5 years |
| Returns on Investment |
No returns; meant for reinvestment |
Fixed interest (taxable) |
| Liquidity |
Can be used for property purchase |
Locked for 5 years, no premature withdrawal |
- Choose CGAS if: You plan to buy or construct a new property and need time to do so. It offers flexibility but must be used strictly for property investment.
- Choose 54EC Bonds if: You want a secure, low-risk investment and do not intend to reinvest in property. However, the 5-year lock-in and taxable interest should be considered.
